(Article from Insurance Law Alert, December 2024)
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Holding
The Delaware Supreme Court granted a motion for interlocutory review, finding that a lower court’s ruling relating to whether a corporate parent’s defense cost payments counted towards its wholly-owned subsidiaries’ self insured retention (“SIR”) addressed issues of material importance to the insurance coverage dispute. Aearo Technologies LLC v. Ace American Ins. Co., No. 423, 2024 (Del. Dec. 2, 2024).
Background
Aearo, a manufacturer and distributor of earplugs, was acquired by 3M in 2008. 3M continued to distribute the earplugs until 2015. Beginning in 2018, hundreds of thousands of claims were filed against Aearo and 3M, seeking damages for hearing-related injuries allegedly caused by the earplugs. The suits were consolidated into a multidistrict litigation (“MDL”) and, in numerous trials that ensued, 3M faced verdicts of over $250 million. Aearo and 3M ultimately settled the underlying lawsuits for more than $6 billion.
In 2023, 3M and Aearo sued several insurers that had issued commercial general liability policies to Aearo, seeking coverage for defense costs as well as a settlement that was reached in the MDL. 3M and Aearo moved for partial summary judgment, arguing that five primary insurers were obligated to cover approximately $372 million that 3M paid in defenses costs and approximately $412,000 that Aearo paid in defense costs. In response, the insurers moved for partial summary judgment, arguing, among other things, that they had no obligation to pay such costs because 3M was not an insured under the policies and because 3M’s payments did not erode Aearo’s $250,000 SIR under the policies.
Decision
A Delaware trial court denied Aearo and 3M’s motion and granted in part and denied in part the insurers’ motion for partial summary judgment. The trial court ruled that, under four primary policies, defense costs paid by 3M did not count towards the SIR and that issues of fact existed as to whether Aearo’s payment of defense costs exhausted the SIR. The court also held that issue of facts existed as to whether Aearo provided adequate notice to or obtained consent from the insurers before incurring defense costs.
As to the primary insurers’ motion, the court ruled that coverage obligations must be decided on a case-by-case basis since the policies had different coverage periods and the suits named different defendants and alleged injuries at different times. The court concluded that issues of fact existed as to whether defense costs were jointly incurred by Aearo and 3M and how such costs should be allocated. The trial court granted one primary insurer’s motion for partial summary judgment (Twin City), ruling that the single Aearo entity that was insured under that policy and had not paid any defense costs that satisfied the SIR.
In granting the petition for interlocutory review, the Delaware Supreme Court emphasized that the trial court’s decision implicated “substantial issues of material importance” to the merits of the coverage dispute, including whether 3M’s payments of defense costs count toward “its wholly owned subsidiaries’ [Aearo’s] self-insured retention.”
Comments
Because a key issue in this case relates to whether an insured’s obligations under a policy can be satisfied by a payment from a corporate affiliate under Delaware law, the Delaware Supreme Court’s ruling may speak to both issues of insurance coverage and corporate law. We will keep you posted on developments in this matter.